Story: The Day Structural Capital Became Sexy

For years, people have been telling me that they can't use the term
structural capital in front of "real" businesspeople. It is too geeky a
term, they told me. (In the field of IC we face this with a lot of our
vocabulary. But I have always thought that if we keep changing the words
we use, we'll confuse people even more).

Anyway, my firm had been engaged to help the sales group in this
division of a multinational. They wanted to figure out how to scale
their group. While they had a dominant market share, they felt that
their industry had only begun to tap potential demand. They thought the
market had the potential to triple in size. The engagement didn't say
anything about IC. But, in the presentation of the results to
management, it was impossible to avoid it.

We presented a simple "org" chart with high level summaries in three
columns under the headings human, relationship and structural capital.
Their story was that human capital was strong but inadequate (in
numbers) to meet the needs of the market. Relationship capital was very
strong on paper as they had long-time relationships and programs in
place with virtually every potential partner in the US. Structural
capital was OK but had lots of room for improvement.

I looked the General Manager in the eye and said that in this structure,
the first option for scaling would be to triple the sales force. He
started shaking his head vigorously. So I shrugged and suggested that
maybe we should look at structural capital. I explained that structural
capital is captured, re-usable knowledge that, done right, makes
everyone in the organization smarter and more effective.

He immediately got it and asked me if we could do a structural capital
gap analysis. It was one of those moments when you want to slap your own
forehead. Why didn't I think of that?

This led to a large follow-on project that I can describe in a future post.

Replies to This Discussion

I will await your future post to read what you can publicly reveal about your findings.

Nonetheless, my experience is that any attempt to count individual components of IC (such as structural capital) is purely an academic exercise. I believe that while for the purpose of theory it is OK to classify IC into Human Capital, Structural Capital and Relational Capital, this is NOT how things work in real life.

In practice, it is the judicious, and mostly unintended, combination of the three components of IC that come together to create value for a business. If you think about it, it will appear common sensical. For instance, can you create value by just hiring great talent? Can you create value if you have great suppliers and Customers but no delivery systems? Can you deliver value if you have great quality processes for building products but no Customers to buy them?

In fact, it is only when Human Capital, Structural Capital and Relational Capital fall in place in the right proportion and at the right time that the business derives value, thrives and even prospers. I am quite sure you will agree.

I am not quite convinced that in practice it is the untintended combination of the three components of IC that come together to create value for a business - If we are to accept that the reinforcing cycle between each component (growth spiral) determines the scalability of IC, then surely the examination of each component to identify strengths and weaknesses will lead to interventions that could address both reinforcing and inhibiting forces - so perhaps it goes further then 'natural' proportion and timing - would you agree?

Abhijit Talukdar said:

Mary,

I will await your future post to read what you can publicly reveal about your findings.

Nonetheless, my experience is that any attempt to count individual components of IC (such as structural capital) is purely an academic exercise. I believe that while for the purpose of theory it is OK to classify IC into Human Capital, Structural Capital and Relational Capital, this is NOT how things work in real life.

In practice, it is the judicious, and mostly unintended, combination of the three components of IC that come together to create value for a business. If you think about it, it will appear common sensical. For instance, can you create value by just hiring great talent? Can you create value if you have great suppliers and Customers but no delivery systems? Can you deliver value if you have great quality processes for building products but no Customers to buy them?

In fact, it is only when Human Capital, Structural Capital and Relational Capital fall in place in the right proportion and at the right time that the business derives value, thrives and even prospers. I am quite sure you will agree.

I am not sure I understand what you mean by "..the reinforcing cycle between each component (growth spiral) determines the scalability of IC.."

This statement seems to suggest a theoretical study based on which such a conclusion is being quoted. Is this true? If so, I have to admit that I have not come across this in IC theory yet and hence will appreciate if you can point me to the relevant text. I can respond to your question thereafter.

My comment re the reinforcing cycle (growth spiral) draws upon my current research (study), where I have found myself exploring alignment between the principles of Mary Adams and Michael Oleksak’s ‘Knowledge Factory’ modelling and Ikujiro Nonaka’s SECI spiral of organisation knowledge creation to propose the IC growth spiral – i.e. a reinforcing cycle between human capital, relationship capital, structural capital (HC + RC + SC = IC) – I also propose the merging of HC and RC but that is mentioned as an aside at the moment. My comment follows this line of inquiry rather than a given conclusion (i.e. ...if we accept....and would you agree; and not with confidence that.....I am quite sure you would agree).

If for example, the development of Structural Capital is not a purposeful intervention to capture tacit knowledge from both HC and RC and convert into explicit knowledge to strengthen HC and RC (growth) I would be most interested to learn of alternative views (and their basis). My comment also acknowledges your observation on the ‘combination of the three components of IC that come together to create value for a business’ - I understood this combination would involve the reinforcement of one component by the other to create value in a systemic way – if I have misunderstood this observation, I welcome clarification as to how the combination actually occurs in practice to create value for the purpose of my post is to learn (and correct assumptions) as much as to contribute.

Kind Regards
Peter

Abhijit Talukdar said:

Hi Peter,

I am not sure I understand what you mean by "..the reinforcing cycle between each component (growth spiral) determines the scalability of IC.."

This statement seems to suggest a theoretical study based on which such a conclusion is being quoted. Is this true? If so, I have to admit that I have not come across this in IC theory yet and hence will appreciate if you can point me to the relevant text. I can respond to your question thereafter.

I sense a temporal connotation in the growth spiral analogy mentioned by you. If you are suggesting that the three components of IC reinforce each other in a spiral manner over a period of time, to scale the amount of overall IC in the organization, it may well be true. Although this theory may be difficult to prove in the context of a running business.

The point I am trying to make is slightly different however. That too purely in the context of a structural gap analysis for a running business, as Mary mentioned in her opening discussion.

I believe that in the context of a running business, the IC practitioner must proceed to identify IC gaps by first asking the fundamental question "Why is this business NOT generating value?" This should lead to a set of value generating propositions/possibilities which are relevant only for this specific business. This should in turn further lead to the discovery of value drivers, which I believe will be a judicious combination of HC, SC and RC. This is the to-be situation mind you, which can then be compared to the as-is situation to arrive at the IC gaps for this business.

In other words, I am suggesting that any anatomical (and all) IC discovery exercise should be linked to the business value proposition, which is the only way in which it can be practically useful to the managers of the business. A standalone gap analysis of structural capital runs the risk of turning out to be an academic exercise, although I am not suggesting that this is what Mary had in mind.

Abhjit and Peter - Thank you for a great conversation here. I will share a couple thoughts and look forward to your reaction.

As I have struggled to learn and apply IC concepts over the years, I have found the need for two approaches:

The first is IC as assets. Here, it is valuable and important to detail exactly what resources an organization has to call upon. I, like you Abhjit, like to focus initially on the value creation process of a company and ask what are the key intangibles that drive customer value creation. In fact, this has become the starting point of almost every client engagement. Here, we are looking for the key (usually less than five from each category) processes (SC), competencies (HC), and relationships (RC) that support that value creation process. Then, depending on the purpose of the engagement, we may interview stakeholders to assess the fitness of these assets as well as how well they are put to use.

The concept of assets in use is the second perspective on IC. Here it is understanding how the assets work together to create value. Depending on the challenge, this may be a high-level drawing of how the assets fit together like this story of Google's business model told with Legos.

Or it may be a much deeper analysis. In fact, to complete the structural capital gap analysis we helped the company make a deeper dive into four core processes using a Value Network approach. I promise to write this up in a short version soon. I published a long version of the case with Verna Allee for the ICICKM conference in Hong Kong last month.

I see these two perspectives as the yin and yang of IC, examining it as a stock and as a flow. We need both perspectives to really understand what is going on. My thinking is probably influenced by my financial and banking background. The stock view is like a balance sheet. The flow is like an income statement.